Taking stock and looking ahead

Concerning the state of the economy, the chatter of pundits is deafening and often confusing. Only a few voices have been able to pierce through the noise with meaningful analysis and forecasting. Chief among them is Kenneth S. Rogoff. Economist, professor, best-selling author, and media commentator, Dr. Rogoff delivers a point of view that is provocative, cogent, and thought provoking. In this interview, he brings his unique perspective to questions about our economy and our future.

GZ: In your new book, you suggest that well-informed people should have taken note of certain events that were predicting a coming recession. What were those events, and why do you think they were ignored?

KR: The two big things that were blinking red lights were soaring housing prices and the huge amounts the US was borrowing from abroad. If one looks at historical benchmarks from other deep post-war financial crises, the parallels between the run-up to the US financial crisis and other catastrophes in Japan, Spain, the Nordic countries, and elsewhere, it was all too apparent that trouble was brewing. I and other economists who viewed this as highly worrisome and unusual were dismissed by many, and particularly by American policymakers, who attributed these developments to rapid growth in the US.

GZ: How could housing prices get so out of control?

KR: Prices were justified by complicated and erroneous explanations. People were told that thanks to deeper and more liquid financial markets, you can afford to pay more for your house, because you can always borrow on it later. Second mortgages were common. Most of all, everyone seemed to believe that no matter how much you paid for your house, someone would be willing to pay even more in a year or two. So there was nothing to worry about.

GZ: So, in a sense, the financial crisis is, in part, related to false optimism.

KR: In a way, yes. But this is nothing new. When you look back in history, it is clearly human nature to want to accentuate the positive. But that’s not the only factor. It’s also about how political systems work, about the fact that money is power. When a lot of money is rolling into the financial sector, it’s very hard to put it in check.

We’re going to come out of this with a greater sense of the limits on what we can have, which is probably a healthy realization.

GZ: You have used the terms arrogance and ignorance to describe a reaction common to financial crises down through the centuries. Can you explain what you mean by those terms in that context?

KR: Well, the ignorance is that in the run-up to a crisis, many people think that it can’t happen to them. They believe financial crises happen to other people at other times in other places. The arrogance comes from the often mistaken belief that we’re doing things better than in the past. That kind of arrogance permeates history.

GZ: But hasn’t the world become more prone to financial crisis over the past three decades?

KR: No, I don’t think so. Take banking crises, for example. They’re pretty common throughout history, and I mean severe crises, not just little ones.

GZ: What about sovereign debt crises?

KR: Some people say they’ve become more common, and there’s something to that. These things are happening more often, and they’re getting resolved more quickly, but, you know, I actually think part of the reason we have more of these types of crises is because of the kinds of insurance we now have that creates moral hazard.

Former chief economist and director of research at the International Monetary Fund, Kenneth Rogoff is Thomas D. Cabot Professor of Public Policy at Harvard University. A prolific writer and sought-after media commentator, Dr. Rogoff is coauthor (with Carmen M. Reinhart) of the best-selling book This Time Is Different: Eight Centuries of Financial Folly, published by Princeton University Press.